Don’t just save, do more with your money

Published: November 2, 2019 8:49:56 AM

Lifespan is increasing and we may well need to plan for 30-40 years after retirement.

money, savings, inflation, SIP, mutual fund, retirementOne also needs to look at savings from the perspective of inflation.

By Ashok Kumar E R

We’ve grown up with the idea that a penny saved is a penny earned.` While this adage may have worked two decades ago, it doesn’t necessarily hold true today. One has to now understand the idea of savings in the context of inflation and how we can use savings as a resource to create wealth.

However, one also needs to look at ‘savings’ from the perspective of ‘inflation’. Inflation is the difference between the cost of living in terms of goods and services and one’s purchasing power. The higher the inflation, the lesser the value of the money you hold. So you’re able to save less.

In India currently, the inflation is approximately 4 per cent, which corresponds with the rate of interest that a bank will pay on your savings account. So Rs 100 in a savings account will rise to Rs 104 after a year. But after factoring in 4 per cent inflation, the value of Rs 104 in your account is roughly Rs 100 after a year. Understandably, therefore, wealth creation is impossible if you ‘only save your money.’

To understand how inflation works a little better – let us take the example of a burger which cost about Rs. 50 rupees in 1999. 20 years on, factoring only inflationary increases, this same burger is now priced at Rs 159. By 2039, all things being equal, the price of the same burger will be closer to Rs 700. These are just some simple indicators to map how inflation affects prices and hence, impacts an individual’s purchasing power and financial health. Is there a way to combat this? YES!

First, combat inflation, then grow your wealth

Getting started: Upgrade your ‘savings mindset’ and adopt a more proactive approach that will make your money work both harder and smarter. Investing is an approach that can help you do this. It will allocate your money to financial instruments which grow your money for you.

Investing your money in mutual funds is smart as well as an easy way to do this. A mutual fund is a collective pool of money put together by individuals and organisations and managed and invested by an expert, usually referred to as a fund manager, on behalf of the collective. Mutual funds are well-regulated (by SEBI in India) investment products of many types and categories, meant to cater to the varied investment needs of everyone.

So how does one begin?

SIPs or systematic investment plans are a good way to start investing a fixed amount of money every month in a mutual fund. This way, you can start with a small amount, and increase it as your income increases. The key to this journey is to have a clear, time-bound and goal-oriented financial plan and being disciplined enough to fulfil it through a regular and timely SIP.

The major short-term task is to stick to a budget that is workable, along with creating an emergency fund as soon as possible. In the medium term (depending on how far away you are from the goal), you can prioritise goals such as children’s higher education or owning a house. For the long term, a non-negotiable goal would be to enable a comfortable retirement, so that you don’t need to compromise on your lifestyle and continue to meet your needs comfortably.

While there are several ways to do this yourself, it is wise to consult a financial advisor who can guide you every step of the way. Online platforms to invest in mutual funds have made it very easy to do this, from end to end.

Lifespan is increasing and we may well need to plan for 30-40 years after retirement. Accumulating your savings in a bank account or even a fixed deposit is not going to be enough. Create a corpus that both facilitates the present, and ensures the future. Regular investments through mutual funds is the one simple habit that can help ensure a lifetime of financial freedom.

(The author is CEO & Co-founder, Scripbox)

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